BLOG: 2021 is the year of the staycation - is it time to look at a furnished holiday let?

Mark Lee, a partner at professional services network EY explores the question of holiday lets - and what you need to consider before branching out into this type of rental.

With question marks hanging over the possibility of foreign travel this summer, it seems 2021 could be the year of the “staycation,” with more and more people turning to short-term lets as real alternatives to hotels for city breaks, holidays, work purposes and visiting friends and family.

Gone are the days when you would only find such properties used for weekly lets during the summer season in coastal resorts.

So, is now the time to consider holiday letting for your next property purchase or an investment property already held?

Whilst we cannot offer advice on whether a holiday let is the right investment for you, we understand that a number of National Residential Landlords Association (NRLA) members have invested in such properties to diversify their portfolio.

Accordingly, as demand for short-term lets increases, let’s look at what you should consider before deciding whether it may be right for you.

Basic rules

There are few important ground rules to consider. Firstly, and importantly, the property must be let with a view to making a profit and not simply to offset costs for your own usage. It must also meet the following tests:

1. The property must be available to be let for 210 days during the tax year.
2. The property must be commercially let for 105 days in the tax year.
3. The total of any long-term occupation, where the property is let to the same tenant for more than 31 continuous days, should not exceed 155 days in a tax year.

Note, these rules apply to the first 12 months of the furnished holiday let business if it is a new let.

Consider the (tax) concessions

If your holiday let meets the requirements, you may benefit from some tax concesions.

• Capital Gains Tax (CGT): when you sell a furnished holiday let, you are able to claim certain CGT reliefs which are not available on ordinary long-term rental properties, including Business Asset Disposal Relief, Roll-over Relief and Hold-over Relief. Current Capital Gains tax rates are 18% and 28% for ordinary residential property depending on your overall tax rate. On the other hand, for those claiming Business Asset Disposal Relief tax, the rate is 10%, no matter what your tax rate is. 
• Mortgage Interest Relief: for ordinary lets, Mortgage Interest Relief has been reducing year on year; however, with furnished holiday lets you can still claim the full mortgage interest amount as an expense which could be an extra 20-25% tax relief per year if you are a higher or additional rate taxpayer.
• A furnished holiday let is treated as a trade: which means that unlike an ordinary let, owners of holiday lets qualified for support from the government during the COVID-19 pandemic. It also means that profits count towards net relevant earnings for pension contribution purposes, whereas those from ordinary lettings do not.
• Business Rates vs Council Tax: if your property is in England and available to let for short periods that total 140 days or more per year, it will be rated as a self-catering property and valued for business rates. If your property is in Wales, it will be rated as a self-catering property and valued for business rates if it’s both available to let for short periods that total 140 days or more per year and is actually let for 70 days.The rateable value of your property is based on its type, size, location, quality and how much income you’re likely to make from letting it. If you only let one property and its rateable value is less than £15,000 you may be eligible for small business rate relief, and you will not pay business rates on a property with a rateable value of £12,000 or less. Don’t forget that that for an ordinary non-furnished holiday let you would be liable to council tax for any unlet periods.
• Capital Allowances: you can claim capital allowances for furniture and furnishings against rental income for a furnished holiday let – you cannot for an ordinary let.

Other considerations and tax implications

One considerable disadvantage to converting your property to a furnished holiday let, or investing in one, is that unlike an ordinary long-term rental, you need to be VAT registered if your turnover is in excess of £85,000. Given competition and price sensitivity, it may not be possible to pass that charge onto customers.

If you would like to know more regarding the above, require tax advice on your property portfolio or require any professional help to complete your 2020/21 tax return, please contact us. Visit ey.com/uktaxchat or contact the EY tax team at [email protected] for more information and a no-obligation discussion today.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice.